Overdue tractor loans reveal stress in farm sector

Data on tractor loans disbursement showed that loans advanced in 2015 were 8 times the volume in 2009, the last drought year preceding consecutive drought years in 2014 and 2015. Photo: Priyanka Parashar/Mint

New Delhi: A complete recovery of the farm sector may need more than a favourable monsoon and is contingent on strong improvements in crop productivity, support prices and successful implementation of budget announcements, rating agency India Ratings and Research said on Thursday.

The report by India Ratings show that nearly 15% of tractor loans disbursed in 2014 and 2015 were overdue for more than three months as of March 2016. The average delinquency rate was 9% during 2009 due to deficit rains and lower farm output, still it took nearly two years for default rates and farm sector growth rates to normalise, the research said.

Data on tractor loans disbursement showed that loans advanced in 2015 were 8 times the volume in 2009, the last drought year preceding consecutive drought years in 2014 and 2015. “Higher delinquency in 2015 has proven that increase in disbursement volume was not in line with the income level and debt serviceability of tractor owners,” the research said.

It added that some non-banking financial companies (NBFCs) financing tractor loans chose to grow despite defaults while other reduced their disbursal.

The research by India Rating shows that while tractor sales were pushed without adequate growth in farm incomes, tractor loans turned costlier. Average interest rate on tractor loans rose from about 17% in 2010 to over 21% in 2014-15. While tractor loans were 8-10% costlier than average home loans in 2010, the spread rose to 12% to 13% since 2014.

The higher interest rates could be attributed to the gradual increase in the perceived risk of delinquency and this is unlikely to come down too quickly, the report said.

The report added that consecutive monsoon failures have impacted the farm sector more severely now than in 2009 and a recovery is likely to be protracted. While 64% of the meteorological subdivisions in India faced deficit rains in 2009 compared to 47% in 2015, numbers show that nearly half of these subdivisions faced two consecutive deficits (in 2015), unlike in 2009.

The June to September southwest monsoon that irrigates more than half of India’s farmlands is forecast to above normal at 106% of the long period average in 2016, after recording a deficit of 12% in 2014 and 14% in 2015. Last year as many as 11 states declared themselves drought hit and the centre spent Rs.13,500 crore assisting these states.

The report said that the absence of significant growth in irrigated area exposes several regions to the risk of erratic rainfall. “Even after a favourable monsoon this year, chances of a complete recovery in tractor loans and farm output may get hampered if the next monsoon is not favourable,” the report said.

On credit flow to the farm sector, the report said that growing risks in the last couple of years resulted in credit rationing by financial institutions. There was a gradual decline in medium and long-term credit supply to the farm sector with share of these loans in total farm credit dipping to 25% in 2014-15 compared to 40% a decade earlier.

However, the centre’s renewed focus on the farm sector-schemes on irrigation, rural roads, interest subsidies for short-term crop loans- could alleviate concerns of a delayed recovery, the report said.